Zacks Industry Outlook Highlights Targa Resources, Sunoco and CrossAmerica Partners
For Immediate Release
Chicago, IL – October 11, 2023 – Today, Zacks Equity Research discusses Targa Resources TRGP, Sunoco LP SUN and CrossAmerica Partners LP CAPL.
Industry: Refining & Marketing MLP
Link: https://www.zacks.com/commentary/2163185/3-stocks-to-watch-from-the-refining-marketing-mlp-industry
Over the past few quarters, fuel margins for the constituents of the Zacks Oil and Gas - Refining & Marketing MLP industry have generally been lower and gone significantly below the extraordinary profitability of the third quarter of last year. While light product inventories amid resilient consumption should continue to support the space, most sector operators are projected to post weaker year-over-year quarterly earnings for the remainder of 2023.
Worse still, the rise in costs due to persistent inflation continues to eat into profits. Having said that, the defensive nature of the stocks and their fee-based business models, combined with attributes to combat the value destruction from inflation, still provide some cushion in an unpredictable market. For those interested in the space, we have earmarked three stocks — Targa Resources, Sunoco LP and CrossAmerica Partners LP.
Industry Overview
Master limited partnerships (or MLPs) differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. Importantly, these low-risk hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities that earn a stable income. The assets owned by these partnerships are typically oil and natural gas pipelines and storage/infrastructure facilities.
The Zacks Oil and Gas - Refining & Marketing MLP industry is a sub-sector of this business model. These firms operate refined products terminals, storage facilities and transportation services. They are involved in selling refined petroleum products (including heating oil, gasoline, residual oil, jet fuel, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum).
3 Trends Defining the Oil and Gas - Refining & Marketing MLP Industry's Future
Margins Fall From 2022-Highs: While refining margins are still relatively healthy, they have moderated considerably from the spectacular levels of 2022. Crack spreads (or the difference between the price of refined products and crude oil) have come down, too. Recessionary impact, if any, will push profitability down further.
With oil exports from Russia continuing to find new outlets like India and China despite price caps and sanctions, product supplies have not tightened to the extent that was expected. This implies that global refinery margins have lately lost steam, depressing the profits of the downstream companies.
Allaying Inflation Concerns: The major refining and marketing midstream players — being largely insulated from fluctuations in commodity prices — maintained their distribution levels through the crisis-stricken 2020. Now, adjusting costs with the prevailing business activity, the partnerships have focused on free cash flow (post-distribution payment) generation to lower debt and strengthen their financial position.
The growing free cash flows could boost investor returns through buybacks and distribution hikes. Finally, distribution growth can also help investors offset some of the value destruction of the prevailing high inflationary environment.
Supply-Chain Disruptions: Despite the relatively bullish energy landscape and improved demand environment, the industry has not been immune to supply-chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited MLPs' (or the energy infrastructure providers, also called the midstream group) ability to ship packaged volumes to their customers. What's worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.
Zacks Industry Rank Indicates a Bearish Outlook
The Zacks Oil and Gas – Refining & Marketing MLP is a seven-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #237, which places it in the bottom 6% 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 challenging 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are getting pessimistic about this group's earnings growth potential. While the industry's earnings estimates for 2023 have gone down 17.1% in the past year, the same for 2024 have fallen 31.7% over the same timeframe.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it's worth taking a look at the industry's shareholder returns and current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas – Refining & Marketing MLP industry has fared better than the broader Zacks Oil - Energy Sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 16% since October 2022 compared with the broader sector's increase of 4.5% and the S&P 500's rise of 20.5%.
Industry's Current Valuation
Since midstream-focused oil and gas partnerships use fixed-rate debt for most 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. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) ratio, the industry is currently trading at 8.87X, lower than the S&P 500's 12.88X. It is, however, well above the sector's trailing-12-month EV/EBITDA of 3.34X.
Over the past five years, the industry has traded as high as 14.93X, as low as 5.76X, with a median of 9.04X.
3 Oil and Gas - Refining & Marketing MLP Stocks to Watch For
Targa Resources: A leading provider of integrated midstream services in North America, Targa Resources' fractionation ownership position in Mont Belvieu is among the company's best midstream assets. The facility has connectivity to supply, storage, terminalling infrastructure, as well as to end markets through petrochemical complexes and exports. The company also has state-of-the-art LPG export facilities on the Gulf Coast at its Galena Park Marine Terminal, which is interconnected to Mont Belvieu.
The 2023 Zacks Consensus Estimate for Houston, TX-based Targa Resources, indicates 26% year-over-year earnings per share growth. TRGP pays out 50 cents quarterly dividend, which yields 2.5% at the prevailing share price. The Zacks Rank #3 (Hold) stock has gained 26.3% in a year.
You can see the complete list of today's Zacks #1 Rank stocks here.
Sunoco LP: Sunoco participates in the transportation and supply phase of the U.S. petroleum market across a number of states. It also focuses on motor fuel distribution to convenience stores, independent dealers and commercial customers. SUN pays out 84.20 cents quarterly distribution ($3.368 per unit annually), which gives it a 7% yield at the current unit price.
The current quarter Zacks Consensus Estimate for the gasoline station and convenience store operator indicates 32% year-over-year earnings per share growth. Over the past 60 days, SUN saw the Zacks Consensus Estimate for 2023 move up 3.4%. Valued at around $4.9 billion, the #3 Ranked SUN has gained 27.3% in a year.
CrossAmerica Partners LP: Wholesale distributor of motor fuels CrossAmerica Partners' variable rate margins helped it offset the loss in volumes during the pandemic. Further, CAPL's recent acquisitions of retail and wholesale assets provide it with a wider reach and scale.
Over the past 60 days, the Allentown, PA-based CrossAmerica Partners saw the Zacks Consensus Estimate for 2023 move up 61.9%. The firm, which pays out 52.50 cents quarterly distribution to yield more than 10, beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. Valued at around $784.5 million, the Zacks Rank #3 CAPL has gone up 9.8% in a year.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Sunoco LP (SUN) : Free Stock Analysis Report
Targa Resources, Inc. (TRGP) : Free Stock Analysis Report
CrossAmerica Partners LP (CAPL) : Free Stock Analysis Report
