Image: BigstockOil prices are still extremely favorable for exploration and production activities. Higher upstream activities will possibly boost demand for pipeline and storage assets, thereby brightening the outlook for the Zacks Oil and Gas – Pipeline MLP industry.The partnerships are generating stable fee-based revenues from their long-term contracts with shippers. Having a huge backlog of growth projects, midstream players secure additional cashflows, depicting a stable and low-risk business model. Some of the front-runners in the industry are Enterprise Products Partners LP (EPD – Free Report), NuStar Energy LP (NS – Free Report), and Delek Logistics Partners, LP (DKL – Free Report).
About the Industry
The Zacks Oil and Gas – Pipeline MLP industry comprises of master limited partnerships (or MLPs) that primarily transport oil, natural gas, refined petroleum products, and natural gas liquids (NGL) to consumers in North America. Apart from transporting the commodities, these partnerships have huge capacities to store oil, natural gas, and petrochemical products.These partnerships are therefore providing midstream services to producers and consumers of the commodities. These partnerships generate stable fee-based revenues from all these transportation and storage assets. The services provided by the MLPs entail the gathering and processing of commodities. The integrated midstream energy players also generate cashflows from ownership interests in fractionators and condensate distillation facilities.
What’s Shaping the Future of the Oil & Gas Pipeline MLP Industry?
Pipeline Demand to Improve: The price of oil has recently been seen trading at more than $70 per barrel. Favorable oil prices will probably aid explorers and producers in ramping up upstream activities, which might improve demand for crude transportation pipelines of the midstream players.Stable Fee-Based Revenues: Most pipeline and storage assets are being booked by shippers for the long-term, making midstream businesses less vulnerable to volatility in commodity prices. Backed by long-term contracts, the MLPs belonging to the industry also have a minimal oil and gas volume risk. Owing to these factors, pipeline players will continue generating stable fee-based revenues.Impressive Project Backlog: Many partnerships in the industry have a considerable backlog of growth projects worth billions of dollars. The projects will come online in a few years, securing additional cashflows for pipeline players.Attractive Distribution Yield: Oil and gas pipeline stocks pay attractive distribution yields. Compared to the overall energy sector, partnerships belonging to the industry have rewarded unitholders with significantly higher distribution yields over the past few years, providing reassurance that the midstream business is relatively more stable than upstream and downstream operations.
Zacks Industry Rank Indicates Bright Outlook
The Zacks Oil and Gas – Pipeline MLP industry is a seven-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #97, which places it in the top 38% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 forms a positive earnings outlook for the constituent stocks in aggregate. Before we present a few stocks that you may want to consider, let’s look at the industry’s recent stock market performance and its valuation picture.
The Industry Outperforms Sector, Underperforms S&P 500
The Zacks Oil and Gas – Pipeline MLP industry has outperformed the broader Zacks Oil – Energy sector, but it has underperformed the Zacks S&P 500 composite over the past year. The industry has rallied 20.8% in the past year compared with a rise of 3.7% of the broader sector and a 23.8% improvement of the S&P 500.
One-Year Price Performance
The Industry’s Current Valuation
Since midstream-focused oil and gas partnerships use fixed-rate debt for the 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. For capital-intensive stocks, 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 10.85X, which is lower than the S&P 500’s 13.64X. It is, however, significantly above the sector’s trailing 12-month EV/EBITDA of 3.7X.Over the past five years, the industry has traded as high as 14.11X and as low as 6.69X, with a median of 9.81X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Pipeline MLPs Leading the Pack – Enterprise Products Partners
Enterprise Products is a leading North American midstream infrastructure provider, generating stable fee-based revenues from its network of NGL, crude oil, natural gas, petrochemicals, and refined products pipelines spread across more than 50,000 miles. Since Enterprise Products’ credit ratings are among the highest in the midstream space, it can lean on its strong balance sheet to survive market turmoils.Units of Enterprise Products, carrying a Zacks Rank #3 (Hold), have gained 13.7% in the past year, outpacing the sector’s 3.7% increase, backed by its low-risk business model. Major capital growth projects that are worth billions and are currently under construction have contributed to this price performance.
Price and Consensus: EPD
NuStar Energy
NuStar Energy is one of the nation’s leading operators of pipeline networks and liquids terminals. This Zacks Rank #3 (Hold) player boasts a stable business model as it has significantly lower exposure to commodity price volatility.
Price and Consensus: NS
Delek Logistics Partners
In the Gulf Coast region and prolific shale play Permian Basin, Delek Logistics offers midstream services like gathering and transportation of commodities, thereby securing stable cashflows. The partnership carrying a Zacks Rank #2 (Buy) is likely to see 12.4% earnings growth this year.
Price and Consensus: DKL
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