The Zacks Oil and Gas Pipelines industry mainly consists of midstream energy infrastructure assets such as pipeline networks, storage terminals and processing units. The gathering pipelines are utilized by explorers to transport extracted oil and natural gas from the wellhead to storage and processing terminals.
In order to comply with rigorous standards, the processing plants purify natural gas liquids (NGLs) into pure methane before transporting to long distances.
Since the transportation and storage properties are booked by shippers for long-term, midstream energy companies receive stable cash flows, reflecting a low-risk business model.
Here are the three major themes in the industry:
- Upstream energy firms in the United States are producing record volumes of natural gas to meet the rising global demand for clean energy. Meanwhile, the anticipated supply disruptions from impending sanctions on Iranian oil by the United States has provided added incentive to American companies to produce more of the commodity in order to capture the Islamic Republic’s market share. Strengthening oil prices have also been boosting domestic production. Further, Canada is seeing massive crude production from oil sands. Thus, the bump-up in supplies of both the commodities has been driving demand for transportation and storage assets.
- In order to support the mounting demand for pipeline, storage and processing assets, midstream energy firms have been allocating higher capital budgets. In fact, companies belonging to the oil and gas pipeline industry collectively spent nearly $1.5 billion through first-half 2018 and are likely on course to outpace the previous year’s $2.5 billion spending by the end of the year.
- Despite massive capital spending, the existing pipeline networks are not capable of transporting the huge volumes produced by the upstream energy firms. This is giving rise to pipeline bottleneck problems in both the United States and Canada. Hence, midstream energy players planning on building a more capable transportation infrastructure by investing billions of dollars. Although new pipeline projects could majorly address the bottleneck issue, the developments are unlikely to start operations before the second half of 2019.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Oil and Gas - Production and Pipelines industry is housed within the broader Zacks Oils and Energy sector. It carries a Zacks Industry Rank #101, which places it at 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 strong 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 is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has increased by 6.3%.
Before we present a few oil and gas pipeline stocks that are well positioned to outperform the market based on a favorable earnings outlook, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Lags on Stock Market Performance
The Zacks Oil and Gas - Production and Pipelines Industry has lagged the broader Zacks Oils and Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 14.2% over this period against the S&P 500’s rise of 3.5% and the broader sector’s marginal fall of 0.7%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month enterprise value-to-earnings before interest, tax, depreciation, and amortization (EV/EBITDA) ratio, which is a commonly used multiple for valuing oil and gas stocks, we see that the industry is currently trading at 14.67X compared to the S&P 500’s 10.87X. It is also above the sector’s trailing-12-month EV/EBITDA of 5.69X.
Over the past five years, the industry has traded as high as 24.08X, as low as 10.65X and at the median of 15.80X, as the chart below shows.
Trailing 12 Month Enterprise Value-to- EBITDA (EV/EBITDA) Ratio
Midstream infrastructure firms belonging to the industry have huge backlog of projects, reflecting massive demand for pipeline and storage assets. The new developments, on which the companies are investing heavily, will likely drive cashflow in the years ahead. This should help midstream energy players to continue rewarding stockholders with lucrative dividends. In 2017, companies belonging to the industry, collectively returned $1.3 billion to shareholders, up almost 40% year over year.
Here, we present four stocks that are well positioned to gain in the near term. One of the stocks sports a Zacks Rank #1 (Strong Buy), while the other three carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enbridge Inc (ENB): This Calgary, Canada-based energy infrastructure company has the most sophisticated crude and liquids pipeline system in the world. Enbridge lost 18.7% in the past year. For this #1 Ranked stock, the Zacks Consensus Estimate for current-year EPS has appreciated 4.3% over the last 30 days.
Price and Consensus: ENB
Kinder Morgan, Inc. (KMI): The consensus estimate for the company’s current-year EPS has moved up 1.2% over the last 30 days. In the past year, the midstream energy player has lost 8.4%. The company, with the largest network of natural gas pipeline in North America, currently carries a Zacks Rank #2.
Price and Consensus: KMI
Pembina Pipeline Corporation (PBA): For this midstream service provider, the Zacks Consensus Estimate for current-year EPS has remained stable over the last 30 days. The Zacks #2 Ranked company’s stock price remains where it was a year ago.
Price and Consensus: PBA
TransMontaigne Partners L.P. (TLP): This Zacks Rank #2 stock has declined 8.4% in the past year. The consensus estimate for current-year EPS for the partnership has remained stable over the last 30 days.
Price and Consensus: TLP
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