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Outlook for Oil & Gas Pipeline MLP Industry Looks Gloomy

Nilanjan Banerjee

The Zacks Oil and Gas - Pipeline MLP industry comprises master limited partnerships (or MLPs) which are primarily engaged in transporting oil, natural gas, refined petroleum products and natural gas liquids (NGL) to consumers in North America. The services provided by the partnerships entail the gathering and processing of commodities as well. Moreover, the partnerships own export facilities that handle NGLs, polymer grade propylene (PGP), crude oil and refined products.

It is to be noted that MLPs are different from companies as they issue units instead of shares.

Here are the industry’s three major themes:

  • Lower drilling and fracking activities as well as conservative capital spending by explorers have slowed down onshore North American crude production. This is likely to reduce transportation volumes of the commodity, affecting the partnership’s fee-based revenues.
     
  • A constraint in transportation capacities in the U.S. shale plays has been stopping explorers from producing at optimum levels. Although new and extended pipelines are coming online, it still requires more pipeline networks to completely eradicate the bottleneck problem. Thus, partnerships are losing out on the opportunity to transport more crude volumes.
     
  • The slowdown in global economic growth has been hurting demand for chemicals and plastics. Notably, NGLs are being used as a feedstock for producing both chemicals and plastics. Since the partnerships connect NGL consumers and producers through midstream energy assets, lower demand for NGLs will likely hurt fee-based revenues.

Zacks Industry Rank Indicates Dull Prospects

The 16-member Zacks Oil and Gas - Pipeline MLP industry is housed within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #176, which places it in the bottom 31% 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 lackluster 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for 2019 has declined 2.6%.

Despite the bleak near-term prospects of the industry, we will present a few stocks that investors can buy or retain given their growth prospects. But it’s worth taking a look at the industry’s unitholder returns and current valuation first.

Industry Lags S&P 500 but Outperforms Sector

The Zacks Oil and Gas - Pipeline MLP industry has lagged the Zacks S&P 500 composite over the past year but outperformed the broader Zacks Oil - Energy sector over the same period.

The industry has declined 5.3% in the past year against the S&P 500’s rise of 14.5% and broader sector’s fall of 10.7%.

One-Year Price Performance



Industry’s Current Valuation

Since midstream-focused oil and gas partnerships use fixed rate debt for 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.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 10.73X, lower than the S&P 500’s 11.15X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 4.64X.

Over the past five years, the industry has traded as high as 18.64X, as low as 10.73X, with a median of 13.92X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio



Bottom Line

The balance sheet of the Zacks Oil and Gas - Pipeline MLP industry is significantly more levered than the broader Zacks Oil - Energy sector, reflecting high debt burden. Importantly, a slowing global economy has been affecting demand for refined products, NGLs and polymer grade propylene (PGP), and thus will continue to hurt the partnership’s cashflows from export facilities.

We are presenting one stock with a Zacks Rank #2 (Buy) which is well positioned to grow. There are four other stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NuStar Energy LP (NS): Based in San Antonio, TX, the #2 Ranked stock has diversified midstream infrastructures that comprise pipeline networks — spreading across roughly 9,800 miles — and 74 storage facilities. The Zacks Consensus Estimate for the partnership’s earnings for the third and fourth quarter of 2019 has been revised upward over the past 60 days.

Price and Consensus: NS



Enterprise Products Partners LP (EPD): Headquartered in Houston, TX, the partnership is a leading provider of midstream services in North America. Through 2019, the Zacks #3 Ranked stock is likely to see earnings growth of 15.2%.

Price and Consensus: EPD



Plains All American Pipeline LP (PAA): Based in Houston, TX, the partnership offers services related to transportation and storage of oil, natural gas and other commodities. Through 2019, the #3 Ranked stock is likely to see earnings growth of 36.2%.

Price and Consensus: PAA



Buckeye Partners LP (BPL): Based in Houston, TX, the partnership is primarily engaged in transporting and storing liquid petroleum products. The stock, with a Zacks Rank of 3, is likely to see earnings growth of 693% in 2019.

Price and Consensus: BPL



Oasis Midstream Partners LP (OMP): Based in Houston, TX, the partnership is a leading provider of midstream services. The stock, with a Zacks Rank of 3, is likely to see earnings growth of roughly 74% through 2019.

Price and Consensus: OMP



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Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
 
Oasis Midstream Partners LP (OMP) : Free Stock Analysis Report
 
NuStar Energy L.P. (NS) : Free Stock Analysis Report
 
Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report
 
Buckeye Partners L.P. (BPL) : Free Stock Analysis Report
 
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