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.
It is to be noted that MLPs are different from companies as interests in MLPs are considered units (not shares) and unitholders are partners in the business.
Here are the industry’s three major themes:
- The partnerships generate stable fee-based revenues from diversified networks of midstream infrastructure that is being utilized by shippers and customers under long-term contracts. Moreover, the partnerships have key capital projects under construction that will generate additional fee-based revenues. Importantly, the midstream business model is not significantly exposed to the coronavirus-induced commodity price fluctuations since most of the infrastructure is being used by shippers for long term.
- With oil prices recovering gradually – West Texas Intermediate crude has recovered almost 8% in the past month – most analysts opine that the decline in the tally of weekly rig will narrow down further. In fact, some analysts believe that if the recovery sustains, since more people are getting back to work on easing lockdown measures, many explorers will consider adding rigs. This signifies the possibility of more oil production, thereby increasing demand for midstream assets.
- Demand for NGL is on the rise since the commodity is being used for producing advanced materials that are being employed for the manufacturing of lighter aeroplanes and cars. Since the partnerships connect NGL consumers and producers through midstream energy assets, the unitholders can expect significant cashflows from higher fee-based revenues.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Oil and Gas - Pipeline MLP industry is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #28, which places it in the top 11% 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 bullish 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.
Taking into consideration the increasingly bullish outlook 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 recent stock-market performance and valuation picture first.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Pipeline MLP industry has underperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year. The industry has declined 46.4% in the past year against the S&P 500’s rise of 4.6% and the broader sector’s fall of 40.4%.
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 7.7X compared with the S&P 500’s 11.63X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 4.01X.
Over the past five years, the industry has traded as high as 16.98X, as low as 6.70X, with a median of 13.36X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Although the partnerships rely on significant debt capital to maintain existing midstream infrastructures and finance growth projects, more than 90% of their debt portfolio carries a fixed interest rate, which reduces threats stemming from interest rate volatility. Also, the partnership’s midstream business is less exposed to fluctuations in oil and gas prices, reflecting a stable business model.
We are presenting five stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are well positioned to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.
Oasis Midstream Partners LP (OMP): The partnership is engaged in gathering and processing services of natural gas in North America. The stock, with a Zacks Rank of 1, has witnessed upward earnings estimate revisions for 2021 in the past 60 days. For 2020, the partnership’s earnings estimate has been steady over the same time frame.
Price and Consensus: OMP
PBF Logistics LP (PBFX): The partnership has operating interests in midstream infrastructures that comprise crude oil and refined petroleum products terminals. Over the past 60 days, the Zacks #1 Ranked stock witnessed upward earnings estimate revisions for 2020 and 2021, respectively.
Price and Consensus: PBFX
BP Midstream Partners LP (BPMP): The partnership is primarily involved in acquiring and operating pipeline networks and associated midstream assets that generate stable cashflow. The #2 Ranked stock has witnessed upward earnings estimate revisions for 2020 and 2021, respectively, in the past seven days.
Price and Consensus: BPMP
Enterprise Products Partners LP (EPD): The partnership is a leading provider of midstream services in North America. Through 2020 and 2021, the Zacks #2 Ranked stock has witnessed upward earnings estimate revisions over the past 60 days.
Price and Consensus: EPD
TC PipeLines LP (TCP): The partnership generates stable fee-based revenues from its low-risk energy infrastructure pipeline networks. Notably, over the past 60 days, the #2 Ranked stock has witnessed positive earnings estimate revisions for 2020 and 2021, respectively.
Price and Consensus: TCP
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