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4 Refining & Marketing MLP Stocks That Are Excellent Buys
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The energy recovery is gaining steam at a faster-than-expected pace as investors welcome the reality of a post-vaccine world. Mobility restrictions have been rolled back and most parts of the economy have reopened. The Zacks Oil and Gas - Refining & Marketing MLP industry has the potential to be the outsized beneficiaries of this supportive environment. In particular, the conservative, income-seeking investors might want to focus on the fee-based business models of Sunoco LP (SUN - Free Report) , Suburban Propane Partners, L.P. (SPH - Free Report) , Global Partners LP (GLP - Free Report) and CrossAmerica Partners LP (CAPL - Free Report) . These high-yielding pipeline stocks are likely to see impressive revenue and cash flow growth.
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 stable income. The assets that these partnerships own 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
Stability of Cash Flows: Considering the volatility in oil right now — especially the jitters associated with the proliferation of the Omicron variant, which spurred a flurry of renewed curbs by governments to check its spread (posing a risk to consumption) — a safer way of playing the sector would be to utilize MLPs, which offer considerable returns at significantly lower risk. The assets that these partnerships own — oil and natural gas pipelines and storage facilities — typically bring in stable fee-based revenues under long-term contracts and have limited, if any, direct commodity-price exposure. In the longer term, these agreements result in steady cash flow through the boom-and-bust cycle. Even within fee-based contracts, a significant portion is of a take-or-pay type, meaning that the MLPs get paid irrespective of the volume of commodities that get transported.
Inflation, Supply Chain Challenges: Despite the 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 the MLPs’ (or the energy infrastructure providers, also called the midstream group) ability to ship packaged volumes to their customers. Most operators have also felt the impact of inflation, which is rolling through the cost structure. 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.
Sustainable Distribution with Potential for Hikes: Investors are typically attracted to MLPs, thanks to reliable distributions and defensive characteristics. The major refining and marketing midstream players — being largely insulated to fluctuations in commodity prices — managed to maintain their distribution levels through the crisis-stricken 2020. Further, their relatively steady coverage and improving commodity price visibility should represent a more predictable midstream payout scenario in the near future. Meanwhile, as a response to the energy downturn, a number of these entities have been highly effective in managing cash outflows. Adjusting costs with the prevailing business activity, the partnerships have focused on the generation of free cash flow (post distribution payment) to lower debt and strengthen the financial position. The growing free cash flows could be used to boost investor returns through buybacks and distribution hikes.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas – Refining & Marketing MLP is an 11-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #42, which places it in the top 16% 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 outperforms the bottom 50% by a factor of more than 2 to 1.
Considering the encouraging 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 & S&P 500
The Zacks Oil and Gas – Refining & Marketing MLP industry has fared better than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 71.6% over this period compared to the S&P 500’s rise of 29.6% and the broader sector’s increase of 37.1%.
One-Year Price Performance
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 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 9.75X, significantly lower than the S&P 500’s 15.68X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 4.42X.
Over the past five years, the industry has traded as high as 17.82X, as low as 6.74X, with a median of 12.53X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
4 Oil and Gas - Refining & Marketing MLP Stocks to Buy Now
Global Partners LP: GLP is a vertically integrated energy partnership focused on the distribution of gasoline, distillates, residual oil and renewable fuels apart from owning several refined-petroleum-product terminals. Unlike most energy operators, which maintained their payout through the coronavirus-induced downturn, Global Partners is among the minority that continued to increase distributions.
The Zacks Rank #1 (Strong Buy) stock’s estimated distribution yield (at 57.50 cents per quarter) is 10.1%. Moreover, Global Partners’ distribution coverage ratio of 1.2X implies a sufficiently covered payout with room for growth. GLP beat the Zacks Consensus Estimate for earnings in two of the last four quarters but missed twice. It has a trailing four-quarter earnings surprise of roughly 13.4%, on average. Meanwhile Global Partners units have gained 51% year to date.
Suburban Propane Partners: One of the largest marketers of propane in the United States, SPH’s operational efficiencies and successful customer base retention should stand it in good stead. Over the past few years, Suburban Propane Partners has diversified its platform through accretive acquisitions.
SPH pays out 32.50 cents quarterly distribution ($1.30 per unit annually), which gives it a 9% yield at the current unit price. The MLP carries a Zacks Rank #1. The fiscal 2022 Zacks Consensus Estimate for Suburban Propane indicates 6.7% earnings per unit growth over 2021. The partnership’s stock is up 5.1% so far this year.
Price and Consensus: SPH
CrossAmerica Partners LP: Wholesale distributor of motor fuels CrossAmerica Partners’ variable rate margins have helped it offset the loss in volumes. Further, CAPL’s recent acquisitions of retail and wholesale assets provide it with a wider reach and scale.
The Zacks Consensus Estimate for CrossAmerica Partners’ current-year earnings has been revised 84% upward over the past 30 days. CAPL pays out 52.50 cents quarterly distribution ($2.10 per unit annually), which gives it a 10.6% yield at the current unit price. In 2021, CrossAmerica Partners units have gained 28.6%. The midstream operator carries a Zacks Rank #2 (Buy).
Price and Consensus: CAPL
Sunoco LP: This downstream operator focuses on motor fuel distribution to convenience stores, independent dealers and commercial customers. A participant in the transportation and supply phase of the U.S. petroleum market across 30 states, Sunoco enjoys stable demand for its services.
SUN pays out 82.55 cents quarterly distribution ($3.302 per unit annually), which gives it an 8.6% yield at the current unit price. The 2021 Zacks Consensus Estimate for this #2 Ranked MLP indicates 743.4% earnings per unit growth over 2020. Sunoco stock has gained 46% in 2021.
Price and Consensus: SUN
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4 Refining & Marketing MLP Stocks That Are Excellent Buys
The energy recovery is gaining steam at a faster-than-expected pace as investors welcome the reality of a post-vaccine world. Mobility restrictions have been rolled back and most parts of the economy have reopened. The Zacks Oil and Gas - Refining & Marketing MLP industry has the potential to be the outsized beneficiaries of this supportive environment. In particular, the conservative, income-seeking investors might want to focus on the fee-based business models of Sunoco LP (SUN - Free Report) , Suburban Propane Partners, L.P. (SPH - Free Report) , Global Partners LP (GLP - Free Report) and CrossAmerica Partners LP (CAPL - Free Report) . These high-yielding pipeline stocks are likely to see impressive revenue and cash flow growth.
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 stable income. The assets that these partnerships own 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
Stability of Cash Flows: Considering the volatility in oil right now — especially the jitters associated with the proliferation of the Omicron variant, which spurred a flurry of renewed curbs by governments to check its spread (posing a risk to consumption) — a safer way of playing the sector would be to utilize MLPs, which offer considerable returns at significantly lower risk. The assets that these partnerships own — oil and natural gas pipelines and storage facilities — typically bring in stable fee-based revenues under long-term contracts and have limited, if any, direct commodity-price exposure. In the longer term, these agreements result in steady cash flow through the boom-and-bust cycle. Even within fee-based contracts, a significant portion is of a take-or-pay type, meaning that the MLPs get paid irrespective of the volume of commodities that get transported.
Inflation, Supply Chain Challenges: Despite the 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 the MLPs’ (or the energy infrastructure providers, also called the midstream group) ability to ship packaged volumes to their customers. Most operators have also felt the impact of inflation, which is rolling through the cost structure. 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.
Sustainable Distribution with Potential for Hikes: Investors are typically attracted to MLPs, thanks to reliable distributions and defensive characteristics. The major refining and marketing midstream players — being largely insulated to fluctuations in commodity prices — managed to maintain their distribution levels through the crisis-stricken 2020. Further, their relatively steady coverage and improving commodity price visibility should represent a more predictable midstream payout scenario in the near future. Meanwhile, as a response to the energy downturn, a number of these entities have been highly effective in managing cash outflows. Adjusting costs with the prevailing business activity, the partnerships have focused on the generation of free cash flow (post distribution payment) to lower debt and strengthen the financial position. The growing free cash flows could be used to boost investor returns through buybacks and distribution hikes.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas – Refining & Marketing MLP is an 11-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #42, which places it in the top 16% 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 outperforms the bottom 50% by a factor of more than 2 to 1.
Considering the encouraging 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 & S&P 500
The Zacks Oil and Gas – Refining & Marketing MLP industry has fared better than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 71.6% over this period compared to the S&P 500’s rise of 29.6% and the broader sector’s increase of 37.1%.
One-Year Price Performance
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 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 9.75X, significantly lower than the S&P 500’s 15.68X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 4.42X.
Over the past five years, the industry has traded as high as 17.82X, as low as 6.74X, with a median of 12.53X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
4 Oil and Gas - Refining & Marketing MLP Stocks to Buy Now
Global Partners LP: GLP is a vertically integrated energy partnership focused on the distribution of gasoline, distillates, residual oil and renewable fuels apart from owning several refined-petroleum-product terminals. Unlike most energy operators, which maintained their payout through the coronavirus-induced downturn, Global Partners is among the minority that continued to increase distributions.
The Zacks Rank #1 (Strong Buy) stock’s estimated distribution yield (at 57.50 cents per quarter) is 10.1%. Moreover, Global Partners’ distribution coverage ratio of 1.2X implies a sufficiently covered payout with room for growth. GLP beat the Zacks Consensus Estimate for earnings in two of the last four quarters but missed twice. It has a trailing four-quarter earnings surprise of roughly 13.4%, on average. Meanwhile Global Partners units have gained 51% year to date.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: GLP
Suburban Propane Partners: One of the largest marketers of propane in the United States, SPH’s operational efficiencies and successful customer base retention should stand it in good stead. Over the past few years, Suburban Propane Partners has diversified its platform through accretive acquisitions.
SPH pays out 32.50 cents quarterly distribution ($1.30 per unit annually), which gives it a 9% yield at the current unit price. The MLP carries a Zacks Rank #1. The fiscal 2022 Zacks Consensus Estimate for Suburban Propane indicates 6.7% earnings per unit growth over 2021. The partnership’s stock is up 5.1% so far this year.
Price and Consensus: SPH
CrossAmerica Partners LP: Wholesale distributor of motor fuels CrossAmerica Partners’ variable rate margins have helped it offset the loss in volumes. Further, CAPL’s recent acquisitions of retail and wholesale assets provide it with a wider reach and scale.
The Zacks Consensus Estimate for CrossAmerica Partners’ current-year earnings has been revised 84% upward over the past 30 days. CAPL pays out 52.50 cents quarterly distribution ($2.10 per unit annually), which gives it a 10.6% yield at the current unit price. In 2021, CrossAmerica Partners units have gained 28.6%. The midstream operator carries a Zacks Rank #2 (Buy).
Price and Consensus: CAPL
Sunoco LP: This downstream operator focuses on motor fuel distribution to convenience stores, independent dealers and commercial customers. A participant in the transportation and supply phase of the U.S. petroleum market across 30 states, Sunoco enjoys stable demand for its services.
SUN pays out 82.55 cents quarterly distribution ($3.302 per unit annually), which gives it an 8.6% yield at the current unit price. The 2021 Zacks Consensus Estimate for this #2 Ranked MLP indicates 743.4% earnings per unit growth over 2020. Sunoco stock has gained 46% in 2021.
Price and Consensus: SUN